ASC: Homing in on the recovery

The US housing sector is a key market for adhesives and sealants producers and looks to be on the rebound after an extensive period of slump

Given the breadth of applications for adhesives and sealants in building construction and maintenance projects, the health of the US housing market directly impacts the sealants and adhesives industry. While the recovery from the recession in 2007-2009 has been slower than normal and rather inconsistent, the economic fundamentals are now in place for an ongoing housing recovery, according to David Crowe, chief economist and senior vice president at the National Association of Home Builders (NAHB).

US housing starts have been held back because of shortages of land and labour Copyright: RexFeatures

Even the headwinds that have been slowing the recovery, including tight financial markets, shortages of land and lumber, and the delay of new household formation by young people, are moderating in a favourable direction. That is certainly good news for manufacturers of adhesives and sealants.

The last several years have been anything but normal for the US housing industry. Historically, following a recession, the housing sector is one of the major drivers of recovery. That did not happen this time. “Because the housing market was a major contributor to the recession, it has not played a part in driving the initial recovery,” says Crowe. In fact, the recovery has been slower even than expected.

The reason: recovery has hinged on development of a stronger employment market, which has not only been slow to occur, but has proceeded intermittently, leading to an inconsistent recovery. When the job market is weak, consumers are generally uncertain about the future and consequently are very reluctant to make substantial investments or purchases, which directly affects the housing market. Spending on maintenance also tends to decline as a result of consumer uncertainty.

POSITIVE INDICATORS
“Fortunately, we have seen a number of positive developments that indicate continued economic recovery and consequently suggest further improvements in the housing market,” Crowe states. He points to an improving job market as one of the most critical factors. Also, consumer confidence increased in August for the fourth consecutive month (according to the Conference Board Consumer Confidence Index) and growth in US gross domestic product (GDP) during the second quarter was a robust 4.2%.

Home prices also continue to rise, albeit at a slower rate than over the last year, with a year-over-year increase of 6%, according to the Case Shiller index. More homes are on the market as well. “Low inventory has been an issue recently and resulted in measurable prices increases. Fortunately, the higher prices and improving economic situation have enticed more homeowners to place their homes on the market. The number of newly constructed homes is also increasing as conditions improve, and as a consequence, the increased availability will suppress any further rapid rise in prices,” Crowe observes.

“The stage is definitely set for continued expansion of the housing market. Momentum is picking up and people are becoming increasingly comfortable with the idea of reinvesting in their homes, either by upgrading or through home improvements. Most importantly, they are realising that there is value in doing so,” notes Crowe.

He does warn, however, not to expect rapid growth. “Expansion of the US housing market will be modest, but it will be consistent, and it is leading toward something called ‘more normal’,” he asserts. One caveat: the continued growth of the housing market does depend on continued growth of the job market and thus an increase in new household formation.

It is important to remember the mantra “location, location, location” when discussing the housing market. The level of recovery has different in different parts of the country depending on how far the market fell during the recession. Certain regions of the country, and particularly the energy belt from Texas to North Dakota, are doing very well, with prices and sales back to or above pre-recession levels. Other regions, such as the Northeast and Midwest experienced greater market declines and have further to go to return to “normal”.

The hardest hit regions, California, Nevada, Arizona and Florida, experienced extraordinary price increases and excessive new home construction in the pre-recession period, and consequently these markets fell the most and have the furthest yet to go.

New household formation is a key engine of the new construction market. As young people leave home and form their own families, they have in the past sought to purchase a new home as soon as possible. They may not buy a new home directly, but by purchasing an existing home, they enable the seller to turn around and upgrade to a new house.

Today, however, new household formation is considerably lower than the 1.2m expected based on the underlying population. Young people are, in fact, delaying household formation and consequently the purchase of their first home. Facing a relatively weak job market and saddled with high student loans, members of the Millennial generation are choosing to live with their parents.

According to a US Census Bureau quarterly survey of housing vacancy and home ownership, the home ownership rate for people under 35 years old dropped from a record high 43.6% in the second quarter of 2004 to its current record low of 36.2% in the first quarter of 2014.

Many of the would-be first-time home buyers that are not living at home are renting apartments. So are previous homeowners that lost their homes to foreclosure. As a result, the demand for rental housing has been very strong, and has in fact returned to normal, while the market for single-family housing construction has only recovered mid-way compared to its pre-recession position, according to Crowe.

SUPPLY IS LOW
It is important to remember that supply and demand is the key to the success of the housing industry. During the recession, there was an excess of houses on the market. As a result, new construction practically came to a halt. That situation is reversed today, with a shortage of new homes in many parts of the country that is hindering growth of the new construction market.

How could this situation arise? During the recession, supply channels were disrupted, particularly with respect to building lots, lumber and construction labour. These supply channels have not yet returned to pre-recession levels, largely in part due to the sluggish recovery.

During the recession, developers stopped buying land and investing in the infrastructure (utilities, roads, etc) needed to establish new residential areas. The process of preparing new lots for the building of new homes typically takes three to four years. Therefore, although developers have been more active, it will take time before the shortage of building lots is resolved. “We are seeing a little bit more land creeping into the market, but for the short term, the lack of developed building lots will slow down growth of new construction,” Crowe observes. He also notes that the logging industry has recovered somewhat and is expected to improve further as demand for lumber continues to remain strong.

The availability of labour continues to be an issue, however. Skilled construction workers are in short supply and are expected to remain so, at least in the near term. According to the BLS Job Openings and Labor Turnover Survey (JOLTS), the number of open, unfilled construction sector jobs is among the highest observed since 2008. In addition, over the past two years, the layoff rate has declined while the hiring rate has increased, which is a further indication that construction labour is in short supply.

One other factor that cannot be discounted is the extremely strict standards for the financing of both land development and home purchases. “Underwriting standards were significantly tightened in the wake of the recession and largely in response to the problems uncovered in the housing market that contributed to the financial collapse. Unfortunately, these standards are based on overreactions for the most part, and have contributed in part to the slowness of the recovery,” Crowe states.

Crowe believes there is a real need for more realistic underwriting standards: “The introduction of such standards would have a positive and measurable impact on the US housing market,” he concludes.

STATISTICS CYNTHIA CHALLENER VERMONT

HOUSING STARTS AND BUILDER CONFIDENCE RISE
According to data from the US Department of Housing and Urban Development and the US Census Bureau, housing starts in the US rose 15.7% to a seasonally adjusted annual rate of 1.093m units in July, the highest level since November 2013. Single-family housing starts were up 8.3% to a seasonally adjusted annual rate of 656,000 units in July, while multi-family production jumped 28.9% to 437,000 units. Separately, the number of issued building permits increased by 8.1% to a seasonally adjusted annual rate of 1.052m units in July.

Builder confidence also continues to rise. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for August, which indicates builder confidence in the market for newly built, single-family homes, rose for the third consecutive month in July. Most notably, the HMI gauges builder perceptions of current single-family home sales, sales expectations and prospective buyers, and all three components rose for those consecutive three months, which indicates a firming of builder confidence.

Finally, existing home sales increased for the fourth consecutive month in July to 5.15m (on a seasonally adjusted annual basis).